OIG Audit Raises Concerns About Medicare Part D Plans

House Democrats want a formal review of Medicare Part D after a federal audit found the program's "sponsors" may have overcharged policyholders by underestimating by billions of dollars the value of drug manufacturers' rebates in nearly 70% of their bids for plan year 2008.

"According to the Inspector General, the private health insurers providing the drug benefit are commonly underreporting drug manufacturer rebates, resulting in billions of dollars of profits at the expense of taxpayers and Medicare beneficiaries," Democrats on the House Energy & Commerce Committee said in a letter to Joseph R. Pitts, R-PA, the chairman of the Subcommittee on Health, and Cliff Stearns, R-FL, the chairman of the Subcommittee on Oversight and Investigations.
"The Inspector General's report reveals severe problems with the structure of the Part D program and the behavior of the private insurers that administer the drug benefit. These failures present a severe risk to program integrity, reduce beneficiaries access to important drugs, increase drug costs for seniors, and cause billions of dollars in wasted taxpayer funds," the Democrats said in their letter.

The Office of Inspector General for the Department of Health and Human Services conducted the audit and examined six Medicare Part D sponsors, and found that some "may deliberately underestimate their rebates to increase profits."

In addition, the audit determined that the sponsors had "commonly had complex relationships with their pharmacy benefit managers, and in some cases, these relationships lacked transparency. This lack of transparency raises concerns that sponsors may not always have enough information to oversee the services and information provided by pharmacy benefit managers." The audit found that some sponsors passed the fees that their pharmacy benefit managers received from manufacturers on to the program, while others did not.

OIG did not identify the six sponsors it audited.

The Plan D sponsors reported receiving $6.5 billion in drug manufacturer rebates in 2008, which represents approximately 10% of total gross Part D drug costs. "Rebates can substantially reduce the cost of the Part D program; however, sponsors must accurately report these rebates to the government in order for the government and beneficiaries to receive any cost savings," OIG said.

In a list of recommendations, OIG urged the Centers for Medicare and Medicaid Services to: (1) take steps to ensure that sponsors more accurately include their expected rebates in their bids, (2) require sponsors to use methods CMS deems reasonable to allocate rebates across plans, (3) ensure that sponsors have sufficient audit rights and access to rebate information, and (4) ensure that sponsors appropriately report the fees that pharmacy benefit managers collect from manufacturers. 

The industry group America’s Health Insurance Plans sees it this way: The Part D program is highly competitive so plans have an incentive to offer the lowest bids and, therefore, the most affordable premiums to attract beneficiaries. As a result, AHIP spokesperson Robert Zirkelbach explains, overall cost of the Part D program is far below original projections – saving money for seniors and taxpayers. According to CMS, the average Part D premium in 2011 is about $30, only a $1 increase from 2010 and well below estimates when the Part D program was enacted.

It is also important to keep in mind, Zirkelbach says, that Part D bids are based on projections of future costs, which are inherently uncertain. As the report notes, he continues, Part D plans reconcile rebates estimated in their bids with the amounts actually collected from pharmaceutical manufacturers to ensure the taxpayer continues to share in any additional savings the plan may be able to generate.